Why Your Prenup May Need A Postnup

You don’t have to be in the shoes of Tiger Woods to be wondering about that prenup you signed years ago.

If life is messy, divorce is probably messier.

So the question is: do prenups hold up when it really counts?

“It’s better to do them right or not do them at all,” says Michael Whitty, a certified financial planner and estate planning attorney with Vedder Price PC in Chicago. “You can end up wasting money on the front-end and back end, through the legal fees of creating it and the cost of fighting it later on. If it’s not done well, you may be worse off.”

Indeed, the record is filled with examples of socialites and celebrities who had the courts rule in favor of the non-wealthy spouse despite a prenup agreement.

Steven Spielberg’s first wife, actress Amy Irving, for example, successfully contested the validity of their prenup during their 1989 divorce and walked away with a reported $100 million.

Ivana Trump, ex-wife of real estate mogul Donald Trump, also challenged their prenuptial agreement in 1991 after her husband's highly publicized affair with beauty queen Marla Maples, landing $20 million, the $14 million family estate, a significant housing allowance and $350,000 a year in alimony, according to reports – far more than the original prenup would have provided.

It’s anyone’s guess how golf pro Woods’ prenup with wife, Elin Nordegren, a former Swedish model, may be altered since publicly he apologized for his extra-marital “transgressions” last month, but it doesn’t bode well for Woods.

The couple reportedly is renegotiating the contract they signed in 2004, which will likely provide added financial incentive for her to remain in the marriage.

Potential Holes

There are countless reasons why prenups are vulnerable to legal challenge and don’t wind up doing what they are generally intended to do—specify the terms for spousal support and the division of property should the marriage terminate by death or divorce, instead of having the case settled in a state court.

Laws governing such contracts vary by state, making generalities difficult, but it’s safe to say that most judges will not uphold the terms of a prenup unless both parties were represented by legal counsel.

No state will honor agreements either that limit future child support, or custody and visitation rights of any children you may have. That’s a matter of public policy.

At the same time, judges in all 50 states will generally disregard a prenup if either spouse fails to disclose all financial assets and liabilities, if one spouse provided fraudulent information about their identity or property, or either party “lacked capacity”—meaning he or she was under the influence of drugs or alcohol, or mentally incompetent at the time they entered into the contract, says Marlene Eskind Moses, a family law attorney in Nashville, Tenn. and president of the American Academy of Matrimonial Lawyers.

That last category can include emotional “duress,” adds Whitty.

“Don’t ask your spouse to sign a prenup just before they walk down the aisle,” he says, noting the courts could consider that spouse to have signed only for fear of embarrassing themselves in front of family and friends.

“I would want to start negotiations for to six months before the wedding date and ideally have everything signed before the invitations even go out. That goes a long way towards avoiding that challenge later on,” he adds.

The most common source of prenup challenges, though, involves spousal support, says Marina Korol, a family law attorney with the Law Offices of Korol & Velen in Los Angeles.

In some cases, the amount provided may have been reasonable at the time the agreement was drafted, but no longer reflects a “fair” dollar figure if the wealthier spouse came into far more money during the course of the marriage.

Prenups that provide no spousal support at all in the event of divorce are particularly hard to uphold, unless both parties have adequate financial resources.

“Spousal support is always subject to the court’s scrutiny and it’s the part of a prenup that most people really are challenging,” says Korol. “Remember that it is only looked at the time of a divorce; not at the time of execution.”

Postnupt Anyone?

If you have a prenup contract in place already, you may need to revise it during the course of your marriage to ensure it remains enforceable and fair to both parties. It then becomes a postnuptial contract.

If you move to another state, for example, you’d be wise to review your agreement and potentially have a new one drafted and signed.

“What might have been a fairly ironclad prenup in the state where you were married may not play out the way you expected if you move to another state,” says Whitty.

Likewise, if the fortunes of one spouse change significantly for better or worse during the course of your marriage, or a spouse who originally waived certain rights changes his mind, you may need to review or revise your contract.

“Perhaps a wealthy man and his wife have a great marriage and have children together,” says Korol. “The woman may say, ‘you know, I don’t really like the fact that I’m waiving spousal support. You’re out there making money and I’m at home with the kids. It’s unfair if we ever get divorced that my work is not quantified,’” says Korol. “She can ask that he get rid of the spousal support clause.”

Alternatives

Prenuptial agreements, however, aren’t the only way to protect your pre-marital assets.

In some cases, assets protection trusts can be even more effective.

These tools allow individuals to transfer ownership of their assets - including real estate, stocks and savings - into a separate trust account and designate themselves as the trustee.

Rob Lambert, president of the Asset Protection Corp. in Manhattan, says such trusts allow you to name anyone you like as a primary beneficiary—including your spouse-to-be. In the event of your death or disability, the spouse takes on ownership of those assets.

During your marriage, however, you also retain the right to remove your spouse as the beneficiary anytime you choose.

If the marriage remains on course, your spouse keeps the beneficiary status. If it starts to crumble, you can always change your mind.

“Asset protection trusts are a wonderful alternative because prenups are great, but they’re hard to sell [to the non-wealthy spouse],” he says. “I’ve had clients whose relationships fell apart after going through the prenup process.”

Whitty agrees: “It is possible to do some planning with trusts and family partnerships, which can be done unilaterally by the wealthier spouse before the wedding. It can reduce the exposure of one’s assets to divorce without the other spouse having to sign a prenup.”

In the midst of picking wedding rings and flowers for the altar, it’s hardly romantic to consider what might happen if the marriage falls apart. But for many couples today, prenups and asset protection trusts are an important part of planning their financial future together.

“Prenups are just one more form of insurance,” says Whitty. “You buy life insurance, but you don’t expect to die. You buy homeowner’s insurance, but you don’t expect your home to burn down and you consider a prenup even though you don’t enter into marriage expecting to get divorced.”